Thursday, February 26, 2009

In 1854 the Northcote-Trevelyan report essentially set out the model of Her Majesty's home civil service that is still used today. In good Victorian style, there there was to be a clear distinction and strict hierarchy between those who set policy, administrative staff, and those who merely conducted routine, "mechanical" tasks. The administrative staff worked directly with ministers, who were accountable to Parliament, but the civil servants of the administrative class were not accountable to ministers, but to the Civil Service Commission.

These were professional staff, who were unchanging even as ministers, governments and even political parties came and went. As a result it was agreed that these senior civil servants would conduct their business in secret, so as not to prejudice incoming governments against individuals who necessarily had would closely with their predecessors often developing policies that were directly contrary to the policies of the incoming administration. Although civil servants could not expect the more lucrative income of the private sector, there was both security and prestige. Senior civil servants could more or less guarantee that a grateful nation would reward them witha knighthood and perhaps some other perquisites of being a full blooded member of the British establishment.

At the same time, the tradition grew of the senior civil servant being a "good all rounder" rather than a specialist. To a great degree the system worked well for as long as the business of the state was relatively limited. However the massive expansion of government after 1945 began to overwhelm the system, since it required a detailed and specialist knowledge. Whereas the French system, under L'Ecole National d'Administration, ENA, created skilled technocrats, Britain continued to rely on a stream of general arts graduates, albeit that these were almost entirely from Oxford and Cambridge Universities and the better English public schools.

Even as early as the 1960s, it was clear that the civil service were no longer up to the job. In 1963 there were only 19 trained economists working the British Treasury. Although there have been several attempts to reform the British administration, most aggressively under Prime Minister Margaret Thatcher, the civil service has been exceptionally resistant to changes. It is widely recognised that the portrayal of the fictional civil servant, Sir Humphrey Appleby, in "Yes, Minister!", as a manipulative uber-conservative determined to thwart rather than expedite the policies of his minister is exceptionally accurate.

And all of this business has been conducted in secret, for a long time under the explicit protection of the Official Secrets Act (1911). Increasingly the answer to the inadequacies of civil service administration was to create a separate QUANGO which would be staffed by specialists rather than the generalists of the administrative branch. Yet these QUANGOs are usually only indirectly accountable to Parliament for their expenditure of government money.

Therein lies the rub: accountability.

The tens of thousands of civil servants in any given ministry are not accountable to the minister who nominally supervises them, but to the Permanent Secretary- the senior civil servant- in any given department. Nevertheless, ministers are still theoretically constitutionally accountable to Parliament for the conduct of their ministry. In fact, in recent years, it is exceptionally rare for a minister to resign over such issues- after all they simply are not able to get to grips with an administration so large in the usually two or three years that they serve as a minister. As a result in reality the government administration of the United Kingdom is accountable to no one.

Meanwhile the cost of administration has skyrocketed. While still providing secure jobs, and of course the occasional knighthood, salaries have grown to levels that match or better those of the private sector. In addition the public sector pension rolls still offer index linked final salary pensions to retiring civil servants- and often these people are allowed to retire at 55 or even 50. Even when private sector pensions were relatively well funded, the UK had a pension deficit of about 30% - almost entirely as the result of the unfunded pension liabilities of the public sector.

In short the costs of the public sector has grown by orders of magnitude, while the quality of services delivered has not. The current situation is that the administration of the UK is both unaccountable and unaffordable.

Yet accountability begins with politicians and the electorate that pays for it all.

The cowardly refusal of the Labour government to release the minutes of the cabinet meetings that took the decision to go into Iraq is contemptible. The fact that Jack Straw can block their release under a piece of legislation named "The Freedom of Information Act" is truly Orwellian.

It is even more contemptible for the Conservative Opposition to support this move.

The Conservatives, no less than Labour, are unable to see the crisis of administration at the heart of the British Constitution. Both Labour and the Conservatives refuse to be held accountable for the decisions that they make: even such critical decisions as Peace or War. By supporting the continued secrecy concerning a decision that cost our country thirty three lives lost in combat and perhaps £20 billion (we are not allowed to know the full cost, but this is an estimate by Joseph Stiglitz), the Conservatives demonstrate their continued thrall to the secrecy of Sir Humphrey.

The lack of accountability at all levels of this secret state has wasted truly gigantic sums of money. The waste of over £13 billion on an unworkable and unnecessary NHS information system is a case in point, as is the waste of billions more at the old Ministry of Agriculture. It is blindingly obvious that public administration in the United Kingdom is in need of complete reform- and yet the Conservatives by their failure to understand that accountability is at the heart of the crisis, are already proving that they intend to use the same old broken methods to try to govern the country.

It won't work.

The size of the state is already unarguably too large, and after the acquisition of the banking sector under Labour, it can not even be sustainably financed.

Retrenchment is inevitable- and that should begin with constitutional accountability and administrative reform. Only the Liberal Democrats seem to recognise that putting a different party in charge of the same structure will not bring about the change that Britain needs.

Reform is a task that can be put off no longer, if we are to avoid bankrupting the whole country.

Iain Dale holds a unique position in the Conservative blogosphere. He is not a "my-party-right-or-wrong" die hard, and yet neither does he embrace the futile posturing of the anti-Cameroons that form the bulk of Conservative Home postings.

His politics are, I sense, to a great degree truly the "Liberal-Conservative" ideology that David Cameron positions himself as holding, and even though we may question the sincerity of Cameron, I certainly do see Iain as a fairly liberal figure within his party. As such, he quite often takes it upon himself to "love bomb" the Liberal Democrats, seeking to consolidate Conservative support from that quarter.

The latest love bomb is a piece he calls "What if Nick Clegg took the biggest risk of all?" and it is a none too subtle insinuation that since the Liberal Democrats are really "just a pressure group", then grown up Liberals would surely prefer to support the Conservatives. Indeed Iain makes no bones about the fact that he wants to see the Lib Dems wiped out as a political force.

I think it is important to respond to the piece, because the tactical positioning that Iain espouses underlines the ideological vacuum that I have identified for some time as the biggest weakness of the Conservative party.

The Liberal Democrats believe that there is a fundamental constitutional crisis within the United Kingdom. An isolated, closed and out of touch political class has emerged, not just amongst elected members of the House of Commons, but through a vast network of political advisers and "researchers" and which even extends into the media. The result has been that most politicians now come through a recognised route to power which is entirely within this system. This political elite is very small and filled with secret and corrupt practices. The affair of Deripaska's yacht showed the pettiness and rank venality of both Labour's Peter Mandelson and the Conservatives George Osbourne. Both David Cameron and the bulk of the Labour Cabinet are entirely products of this limited and narrow world.

The problem is that the life experience of the politicians in this narrow elite is insufficient to understand the difficulties of the administration of office. Policy making- for the Conservatives just as much as for Labour- has become a function of spin rather than facing the realities of substance. Increasingly the mismatch between what politicians say and what they are physically able to deliver has become so vast that the electorate views the political world with cynicism. Instead of respect for the patriotism of our leaders, the continuous rain of petty scandals alienates the electorate so far as to leave nothing much more than contempt- a state of affairs that is so corrosive as to threaten our very democratic way of life.

Despite their power, the political parties are growing moribund as the gnawing cynicism makes any party political participation socially rather questionable. Despite this, Iain Dale will know that if he had been successful in his bid to unseat the Liberal Democrat MP in North Norfolk it would have been at least as much for the handful of votes he gained in his selection as Conservative candidates as for the far larger number of votes he would have required to be elected. Likewise, when I was selected as the Liberal Democrats candidate in Buckinghamshire, my selection hung upon a knife edge: a victory of just two votes.

If we are to protect our democratic freedoms it seems quite clear to me that the closed shop of politics must be broken. The incompetently managed and partial constitutional changes undertaken under this Labour government must be resolved. The complete reform of the House of Lords is overdue. The constitutional imbalance between those parts of the United Kingdom with devolved assemblies: Scotland, Wales and Northern Ireland, and those that do not: England, must be addressed. The shadow regions of England that currently exist must either be brought out of the shadows and made explicit or they must be abandoned altogether. The electoral system that gives the power to form a government to those few Parliamentary constituencies that are competitive at the expense of the wasted votes in the vast majority of uncompetitive "rotten borough" seats must be addressed. At the very least the electoral system must reflect in Parliament how people vote.

These are serious policies and combined with the myriad of detailed social and economic ideas and policies underline the seriousness of the Liberal Democrats as a political party. Iain Dale's mischievous suggestion that the Lib Dems are simply a "pressure group" is very wide of the mark.

The real question in British politics is not whether Nick Clegg would take a risk with the Conservatives- at the moment there is no reason for him to talk to the Conservatives at all. The real question is whether David Cameron accepts the scale of the current political decay.

Would the Conservatives be prepared to support a Royal Commission on constitutional reform? Would David Cameron be prepared to abide by the findings of this commission? Are the Conservatives prepared to see a full reform of our voting system- ratified by referendum if need be?

Iain Dale asks if the Liberal Democrats are prepared to take a tactical risk with the Conservatives. Yet the real question is whether of not the Conservatives are prepared to fill their strategic policy vacuum with substantive ideas.

Above all the question is whether David Cameron is prepared to explicitly offer the constitutional changes our country needs- and mean it. It is surely only by taking those risks that he can prove himself to be a genuine Liberal-Conservative. There is nothing in his background in the political class that gives me hope that he is prepared to put more than futile love bombs and empty air on the table.

Conservative Central Office knows how fragile genuine support for their party is- even as they see good Conservative poll numbers, they also see that their support is still very soft. They know that there is still a chance for the Liberal Democrats to make progress at the next election, and they fear this. In such a bunker mentality, it is unlikely that the Tories would rock the boat to make such an historic offer of constitutional change- however much that some may privately accept that these reforms are necessary for our country.

It bodes ill for the leadership of any Prime Minister Cameron if he fails to take that risk now. It may prove to the measure of the Conservatives failure if they continue to believe in the idea that the problems of our country are the result simply of the party of government.

We not only need to change the party of government. We need to change the system of government.

Tuesday, February 24, 2009

February 24th 1918 was the day that the Estonian Maapaev declared the independence of the Estonian Republic.

Throughout the period of independence between 1918 and 1940 the day was celebrated with certain traditions. While every day the flag of the Republic was raised at sunrise from the Pikk Hermann tower of Tallinn castle, and the national anthem played, on the "EestiVabariigiaastapaev" - the anniversary of the Estonian Republic- there were special celebrations. Speeches were made and during the day a great parade and an evening ball hosted by the President.

After the occupation, first by the Soviets, then by the Nazis, then by the Soviets once more, all traces of the identity of the Estonian Republic were systematically rooted out. Only the hated hammer and sickle flag flew from Pikk Hermann. Even wearing clothes containing the national colours of blue, black and white could have you arrested and sent to Siberia for life. The national anthem was banned.

Although around one third of the pre-war population was shot or exiled, including all of the leaders of state, university, business or the Lutheran church, yet still the Estonians clung tenaciously to their sense of self. As the influx of Russian speakers from across the Soviet Union at times threatened to become a flood, still the remembrance of the golden years of independence grew ever brighter.

The crime of the Soviet occupation remained unfinished business between the West and the Soviet tyranny. Britain, the United States and several other countries never recognised the legality of the Soviet annexation of the three Baltic Republics: Estonia, Latvia and Lithuania. As a result there remained a network of diplomatic representation which continued the legal existence of the Estonian Republic. They would fly the forbidden national colours from their magnificent, though faded, diplomatic missions.

One day, thirty years ago I was in London with my family on a trip to visit the National History Museum. We parked in Queens Gate. At that time I had a perhaps rather adolescent enthusiasm for heraldry and flags. As a result I had been given a collection of cigarette cards of 1936 of flags of the world. Amongst many others, there was the flag of the Spanish Republic, of Nazi Germany, but also the blue-black-white of Estonia, the deep crimson with a thin white stripe flag of Latvia and the gold, green and red colours of Lithuania. Thus it was that when I saw the blue-black-white flag flying from the mansion that described itself as "the Estonian Legation and Consulate General" next to the museum, I knew that it was indeed the Estonian colours, without in fact knowing anything else about the country.

When I returned home I tried to find Estonia on the map- but mysteriously it did not appear to be independent at all, and the flag in the encyclopedia was a minor variant of the Soviet Hammer and Sickle flag. Thus, next time I was in London I resolved to visit the mysterious Legation. Rather timorously I rang the door bell of the imposing mansion. I was greeted by an elderly lady who I later came to know well, Anna Taru. Over a coffee, she began to tell the history of her country and the horror of occupation and exile. Over time, I came to discover the Legations of all the Baltic countries and the governments in exile- including the Polish government in exile in London- that resisted the cruelty and violence of Soviet Power.

In the end the history, politics and economics of central and eastern Europe became my undergraduate and post graduate education and, following the great shouts for Freedom in 1989 and 1991, it became the region where I practiced my career in finance. I have travelled all over the region and continue to do so. The baroque beauties of Vilnius and Krakow, the Austro-Hungarian elegance of Budapest and Zagreb, the art nouveau eclecticism of Ljubljana and Riga and the more austere Gothic beauties of Tallinn and Prague have all become as familiar to me as my own home.

Two years ago I received a decoration from President Ilves of Estonia as a token of thanks for whatever services I may have been able to offer the reborn and free Estonian Republic.

Today, as I now mostly live in Tallinn, I joined the crowd in the courtyard of the Estonian Parliament in Tallinn Castle, wearing my medal on my coat. The flags of the different University fraternities mingled with many who held the simple blue black and white colours of the reborn Republic. Slowly, as the sun rose, the flag broke free on the flagstaff at the top of Pikk Hermann tower and rose as the national anthem was played by the police band and sung with gusto by the crowd. Speeches were made, then the crowd sang EestiKodu- "Estonian Home"- then a blessing from the Lutheran Bishop and the hymn Head JumalEestit- "God Bless Estonia". The television cameras rolled.

I was struck, as I have been so many times over the past years, by the family atmosphere of these national occasions in Estonia. The sense of national solidarity which seems the opposite of national chauvinism. The speeches were sombre and measured, with much mention of the difficult economic challenges ahead. The pride was obvious but restrained- reflecting perhaps the cautious but determined, even stubborn Estonian character that I have learned to love so well over the past thirty years.

Quietly- as is the Estonian way- this once vandalised and oppressed corner of Europe has recovered her dignity and freedom. On this, the ninety-first anniversary of the proclamation of the Republic I add my voice to those who say:

Monday, February 23, 2009

In May 2008 I blogged about the power of money in British politics, and how it has reshaped the forms and methods of political parties, especially the Conservatives. The point of the post was to highlight the sinister role of Michael Ashcroft as a major source of finance to the Conservatives.

The news that the electoral commission has launched an investigation into the donations offered by the Belizean billionaire rather underlines my point at the end of that first post: that the Conservatives may rue the day that they entered into such a close relationship with such a controversial figure.

More widely, it underlines the increasing urgency for a major reform of the House of Lords. Michael Ashcroft refuses to confirm whether he is a resident in the UK or Belize- and he has even served as ambassador for the tiny country to the United Nations. After several very large donations to the Conservatives, he was nominated for a peerage. It is hard to avoid the idea that essentially this man, who refuses to confirm whether he even pays taxes in Britain, bought his way into the lawmaking body of the United Kingdom.

Given that the ex-convict Jeffery Archer continues to be a member of the House of Lords, and the certain rather questionable deals of four Labour peers the upper house is beginning to resemble a rogues gallery. The time has come for the reform of the House of Lords to be completed as soon as possible. It should not be possible for foreigners to seemingly buy a seat and it should not be impossible to expel a convicted criminal from the Upper House of our Parliament.

As for Lord Ashcroft- we must of course await the results of the investigation, but should the commission find against the Conservatives, the consequences would be serious, and they ought to be.

Wednesday, February 18, 2009

The latest economic news out of eastern Europe is not just bad in itself. It underlines that the epicentre of the financial crisis has shifted from America very firmly to this side of the Atlantic.

Rapid devaluations of all the free floating currencies in Eastern Europe, irrespective of the policies or the circumstances that apply in any given country suggests a collapse of confidence that borders on the irrational. Meanwhile, the other European free floating currencies, such as the Swedish Krona or Sterling have also devalued. This leaves the countries that have fixed their currencies to the Euro zone, but have not yet adopted the single currency itself, looking very vulnerable.

Bulgaria, Estonia and Lithuania are all tied to the single currency through a system called a currency board, which means that none of the national currencies, respectively the Lev, Kroon and Litas are issued without a corresponding collateral of Euros in the reserves of the Central Bank. In theory, therefore there is no point in selling the national currency for Euros, since the reserves fully back the notes and coins in circulation. Meanwhile, the broader money measures are covered through the banking sector that created them. Given prudent policies by the government then, it should be in fact be essentially impossible to break the currency link.

The odd one out in the Baltic is Latvia which does not operate a currency board. Nevertheless, the Bank of Latvia maintains very high levels of reserves in order to back the currency- indeed at times the Bank of Latvia has claimed that they have over collateralized their currency. However, unlike Estonia and Lithuania, Latvia has had a significant domestic bank- Parex Banka- which got into difficulties and which, in common with banks across Europe has had to be rescued. This in turn required Latvia to seek the aid of the IMF in order to fund the rescue.

The consequence has been a growing scepticism of Latvia's ability to maintain its exchange rate, within the tight constraints of ERM II- the system that dictates the intervention points for the Bank of Latvia to buy and sell their currency in order to maintain a range no greater than +/- 1% of the central reference rate to the Euro, which is €1 = 0.702804 Latvian Lats.

As a Baltic Central Banker said to me only this week, if you fix the currency, then everything else in the economy has to be flexible. Yet in fact the policy that fixes the currency against the Euro is now, in the face of the rapid devaluation of all neighbouring currencies, actually forcing a rapid and very large real appreciation of the Baltic currencies against those of almost all their neighbours. The recession that was in any event headed towards a 10% fall in GDP now could end up even worse. We are seeing real wage cuts of 30% being imposed across the board, and this could be just the beginning.

Despite the fact that the Estonians especially have argued that they would lose much hard earned credibility by going down the path of devaluation, the fact is that maintaining the current rate of 15.67 Kroon to the Euro is essentially seeing a wholesale transfer of real Estonian wealth to the shareholders of the Swedish owned banks in the country. The massive cut in Estonian living standards which this implies is not something that a responsible policy maker should be contemplating, and yet both the central bank and the government continue to insist that there is no "Plan B".

The counter argument, put forward by the policy makers is "who benefits?" from a devaluation. The fact is that I am certainly not an advocate of a loose monetary policy: it has been a continuous soft option for the UK and in the end it has brought us inflation and eroded living standards over the longer term. Nevertheless these are exceptional times and by making a policy decision to devalue in an orderly way now, it at least buys some time for the Baltic economies to adjust to the increasingly deep economic crisis that is hammering into all of the European economies at the moment. The answer to that question posed by the Central Bankers is that the current policy now benefits only the mostly Swedish-owned Banks at the expense of the real wealth of every single Estonian citizen. By cutting relative costs in Estonia through devaluation, the economy will not have to endure the savage real cut in Estonian living standards that the currency board is now demanding.

That is a benefit well worth the swallowing of some pride at the loss of an economic virility symbol that is doing far more harm than good to the economic interests of Estonians.

Monday, February 16, 2009

"I disapprove of what you say, but I will defend to the death your right to say it"

Voltaire

The exclusion from the UK of Geert Wilders, a Dutch MP who has some rather trenchantly hostile views about Islam was simply craven. I don't necessarily believe what he says, and I certainly disagree with the manner in which he expresses himself. However I do believe that free speech should be kept free, no matter what.

Perhaps even more offensive do I find these American nutters from the Westboro' Baptist Church, who mostly seem to be related to each other. They are childish and ridiculous controversialists. Their latest immature stunt is to picket some play in Britain, because it might not regard homosexuals as sub-humans with a one-way ticket to Hell.

Apparently these nutters picketing a school are somehow less prejudicial to public order than a private seminar inside the British Parliament Building hosted by several Members of the House of Lords.

Now following on from the same logic that banned an elected politician from a friendly country, one might expect that these pathetic bunch of nutters would also face a ban. On the other hand perhaps not.

If not, then the Home secretary should surely resign (I mean on an issue apart from her manifest greed and incompetence).

The fact is that Britain is now happy to restrict free speech all over the world through the disgraceful manipulation of our too-broad libel laws by greedy lawyers. Nevertheless a free country must have free speech, even for inbred nutters from Hicksville and certainly for Dutch MPs.

I don't necessarily like what they say, but it is not up to the state to decide whether I should be allowed to hear them or not.

Sunday, February 15, 2009

The credit crisis is continuing to descend into a prolonged depression. Ireland now faces a crisis that is so severe that it is now facing the real possibility that it cannot finance its own debts without major assistance from the rest of the European Union.

Meanwhile in the UK, the nearly 40% devaluation of Sterling may cushion some of the blow, but the implosion of such a huge part of the financial sector in an economy dominated by financial services has clearly been a body blow to the future prosperity of Britain.

In the face of the escalating collapse, the previous slogans of Gordon Brown: "An end to boom and bust", "prudence with a purpose" and so on are now revealed as empty air. Despite the initial burst of activity, the current government response has also been revealed as equally threadbare. Despite every attempt, the Labour government is still sinking deep into the mire.

The return of Peter Mandelson with his trailing miasma of sleezy and unprincipled politics has only served to underline the scale of the crisis, both personal and political that is engulfing the British Prime Minister. As rumours grow of his failing eye-sight the atmosphere around number 10 Downing Street increasingly resembles that of the court of King Lear.

Internationally it has become the conventional wisdom that the "British model" has failed, and even our allies have ceased to be polite to a government that they increasingly regard as finished.

The news for the Labour Party is now extremely bleak. While they continue to retain strong footholds in Scotland and Wales, in many parts of England the greater part of their support in some areas has disappeared completely. The latest run of opinion polls suggest that Labour are facing extinction in the South and risk losing a great belt of seats across the marginal Midlands and in even the north.

Yet these same polls do not show enthusiasm for the Conservatives- although they are managing to keep their poll ratings above the critical 40% mark, deeper analysis of the polling numbers still make for dismaying reading for Conservative strategists: the Conservative support remains soft, and the electorate still seems to doubt Tory skills in the vital area of economic competence.

The Labour party could now be facing the moment of truth. It seems quite possible that a significant chunk of Labour support is leaking over, not just to the Conservatives but also to the Liberal Democrats. The recovery of the Liberal Democrats to levels of around 22% could be potentially devastating for Labour. Were the Lib Dems to start an election campaign at that sort of level, then if they match their traditional increase over the campaign, then they could, not only out poll their previous percentages, but also catch Labour in a fatal pincer that would remove them from power and potentially destroy them as a governing force.